Even in the context of financial reporting, information is not required to be a financial metric or even quantitative to qualify as material. To a limited extent, regulators have attempted to provide some guidance for reporting on "non-financial" environmental, social, and governance (ESG) issues, most recently on climate change or environmental issues more generally. In doing so, they illustrate the perils of regulatory intervention. Time will tell how regulators in European Union countries implement the legislation discussed in Chapter 3 and how central the concept of materiality will be in their efforts to do so.18

In January 2010, the Securities and Exchange Commision approved Commission Guidance Regarding Disclosure Related to Climate Change 19 regarding climate disclosures that might impact a company's operations. In its release, the Commission did not issue any new regulations. It simply stated, "This interpretive release is intended to remind companies of their obligations under existing federal securities laws and regulations to consider climate change and its consequences as they prepare disclosure documents to be filed with us and provided to investors."20 While noting that companies could voluntarily disclose climate-related issues in a sustainability report, the Commission also remarked, "Securities Act Rule 408 and Exchange Act Rule 12b-20 require a registrant to disclose, in addition to the information expressly required by Commission regulation, 'such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading.'"21 According to Ceres,22 this guidance has not been aggressively implemented by corporations or enforced by the SEC.23

In its release, the Commission is clearly using the same "rational investor"24 definition of materiality for climate change issues as for financial information when it reviews "the most pertinent non-financial statement disclosure rules": description of business (Item 101 of Regulation S-K), legal proceedings (Item 103 of Regulation S-K), risk factors (Item 503 (c) of Regulation S-K), and management's discussion and analysis (Item 303 of Regulation S-K). The release then interpreted these general rules for disclosures related to climate change by discussing "some of the ways climate change may trigger disclosure by these rules and regulations." Furthermore, the impact of legislation and regulation, international accords, indirect consequences of regulation or business trends, and physical impacts of climate change are given as examples.25

The mostly negative reaction from the corporate community was very strong. A Forbes op-ed piece scathingly denigrated the SEC move as "an effort to remain relevant after Madoff," forecasting that "while there are no completely new disclosure requirements here, the 'interpretation' could impose a world of hurt and uncertainty on firms without benefiting (and likely even hurting) investors."26 As of 2013, an estimated 73% of publicly traded companies were still not providing disclosures on climate change.27 Given that materiality is an entity-specific concept, it is impossible to know what percent regarded climate change as a material issue but chose to ignore the SEC's guidance and what percent simply did not see this as material to their business.


Materiality's centrality in disclosure means that any organization whose mission concerns disclosures by companies must address how it defines the term. Five organizations—Account Ability, CDP, Global Reporting Initiative (GRI), the IIRC, and the Sustainability Accounting Standards Board (SASB)—are particularly important in framing the concept for integrated reporting. In contrast to regulators and accounting standard setters, these organizations are heavily, if not exclusively, focused on nonfmancial reporting. None has official support from the State in any country. Their definitions of materiality vary in terms of: (1) the audience targeted by the organization (shareholders vs. other stakeholders), (2) whether the determination of materiality depends on some degree of engagement with the audience, (3) whether other information is considered as relevant context, and (4) the organizational boundary of the disclosed information. Thus, the degree of difference between these organizations' definitions of materiality and those of regulatory bodies like the SEC (or regulatory-sanctioned bodies like the International Accounting Standards Board (IASB)) varies as well.

Showing wide variance, Table 5.1 summarizes the characteristics of the different definitions of materiality for these five organizations and the definition typical of regulatory bodies. CDP and SASB bear the closest resemblance to the regulatory definition. CDP hews closely to that of the IASB. SASB takes its definition directly from the SEC and U.S. case law, and thus is the only one of the five to imply the "total mix" of information.28 For both, the reporting boundary is the company (SASB is focused only on companies, but CDP has a broader range of reporting entities which it does not explicitly reconcile with a definition of materiality created for public companies), the primary intended users are investors, and engagement is not part of the materiality determination process. However, this does not map seamlessly onto the regulatory definition. Both CDP and SASB see the act of reporting as a way to create positive social impact and improve a company's performance, emphasizing the importance of the long-term. None of these concerns are addressed in the regulatory definition.

Followed by AccountAbility's, GRI's definition of materiality is the furthest from the regulatory one. The latter does not match exactly with the regulatory definition on a single one of the eight characteristics. AccountAbility only matches on two: companies are the only preparing entity of interest and the company is the reporting boundary. The IIRC's definition is about halfway between the regulatory one and that of AccountAbility and GRI, falling somewhere between these definitions and those of CDP and SASB, as it is only focused on companies as a preparing entity but recognizes a larger boundary than the company itself. Although the primary users for the IIRC are providers of financial capital, the IIRC does not ground its definition in regulation, as do CDP and SASB. It also recognizes that other stakeholders

TABLE 5.1 Comparison of Materiality Definitions

Comparison of Materiality Definitions

can find an integrated report useful—most likely those who want a holistic view of the company's performance and prospects. Also, unlike the regulatory definition, the IIRC regards engagement as part of the materiality determination process. Like all other voluntary standard setters, it sees reporting as a way of improving company performance, having a positive impact on society, and encouraging a longer-term perspective on the part of the company.

Much like the "Conceptual Frameworks" published by Financial Accounting Standards Board (FASB) and the IASB that establish the basic principles and elements of financial reporting,29 the IIRC's International <IR> Framework (<IR> Framework) establishes the essential architecture for an integrated report. The standards and definition of materiality for the financial information in the report will come from IASB, U.S. Generally Accepted Accounting Principles (GAAP), or a local country GAAP. Because SASB, like the IIRC, is focused on investors, its definition of materiality is closer to their needs than that of stakeholders. However, because its definition is so grounded in a U.S. context and anticipates stakeholder engagement by sector and industry rather than by company, an integrated report may contain information on non-financial performance that goes beyond SASB's standards. If a "reasonable investor" does not see a particular stakeholder's issue as relevant it would not clear the materiality hurdle by the SEC's, and hence SASB's, definition. But if, in the company's judgment, the issue important to this stakeholder can affect its ability to create value for shareholders over the long term, the company's performance on this issue should be included in its integrated report. GRI's G4 Guidelines will be useful here. The IIRC and GRI are also more entity-specific than SASB, which is broken down by sector and then industry. CDP can be seen as a "subject matter expert" on certain environmental issues. Some of the standards contained in the Climate Change Reporting Framework can be included in SASB's standards30 and the G4 Guidelines.31

AccountAbility's role is to provide guidance on the materiality determination process itself. Its focus is neither a general framework, like the IIRC, nor making recommendations on specific items to be reported, like CDP, GRI, and SASB. Companies interested in starting the journey towards integrated reporting should start with the <IR> Framework, using the SASB standards relevant to their industry, and the Climate Change Reporting Framework if environmental issues are material to them. They can then expand the reporting boundary as they see necessary and, through a process of engagement and the G4 Guidelines, provide whatever additional information on nonfmancial performance is appropriate. Because this will likely still leave a great deal of information of interest to stakeholders out of the integrated report, this information should be made available in other ways, such as in an online sustainability report.

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